Interview with Corey Rosen

Corey Rosen

Q: Did you start out as an ESOP advisor, or did you have a different background?

I started out as a political scientist, then went and worked on Capitol Hill for 6 years. Eventually, I became involved in ESOP legislation. I worked on the Hill from '75 through '80. There were two things that I was involved in, bills that I drafted that became law. One was the Chrysler Loan Guarantee Act that required Chrysler to set up a $165 million dollar ESOP as part of the transaction.

Also, what now is Section 1042, the tax deferral for owners.

A business owner came to the office once and said, "I'm selling to my ESOP, and this isn't going to help me, but it's not fair that I have to pay capital gains tax if selling to my employees, but I don't have to pay capital gains tax if I sell to John Deere."

This seemed persuasive to me, so we created a bill – this wouldn’t affect him at all, and he knew it – but we created a bill that would allow people to take a tax deferral if they sold to an ESOP in the future.

Q: And this has become one of the main attractions to ESOPs?

Yes, at times, right now it's probably less of a factor that it has been in years when capital gains rates were higher, and people's perceptions about the stock market were different. But yes, it's been a big factor.

Q: So you got into this from the legislative side. What were you doing in Congress?

I was working for the Senate Small Business Committee. Dealing outside of the big national-attention getting issues, where you have tons of lobbyists and money, the vast majority issues that come before Congress, the process is either your boss gets an idea based on something he or she has read about or talked with a constituent about and asks a staff person to create specific legislation. The process can also go the other way, with a staffer suggesting an idea to the Member. In this case, it was not a constituent, it was just a person who was involved in employee ownership who knew that I was involved and interested in it, and so he came to the office, we talked about it, and I drafted the outline of some legislation. A nonpartisan service in the Senate then drafts it into appropriate legal form.

Before you go too far, you have to make sure that the committee chair will agree to consider it. One of the senators on the committee liked the idea, so I started working on it, and then went to the committee chair, who's really my boss. It was Gaylord Nelson - he was a liberal; he was the father of Earth Day, and one of the two people who opposed the Tonkin Gulf Resolution that got us into the Vietnam War.

Anyway, I said, "Senator Nelson, here's this bill on employee ownership that I've been working on, at Senator Stewart's request." I described to him what it was, and his reaction was, "That sounds like socialism to me."

Q: ...Which he was for or against?

He was worried it would be perceived that way. He liked the idea of employee ownership, but he was concerned about the perception.

We had also talked to Senator Goldwater's office, and they liked the idea. Once Senator Nelson knew that there were conservatives who liked it too, it was an easy sell.

At that point, you start talking to the staff of other senators, and trying to feel out whether their office would be supportive. We lined up several key senators. Russell Long from Louisiana was one of them. He was chair of the Senate Finance Committee, which writes the tax laws, and at the time he was arguably the most powerful member of the Senate. Everybody had some tax thing they wanted, so you had to go through him to make that happen. There'd be no ESOPs without Russell Long.

Q: At the time, was employee ownership not a heavily lobbied issue?

It's never been a heavily lobbied issue in the sense most people think of lobbying, even now. That’s not a critique of the ESOP Association, they'd tell you themselves that they're a very small player in the lobbying world. They do a very good job with the resources they have, but they don’t have the kind of clout of, say, an AARP or NRA.

There are two different kinds of lobbying. There's the kind that people think about, which is NRA, AARP type lobbying, where some trade association goes to the Senate or to push an issue.

It's not that there's an exchange of money for a vote – that's actually extremely rare. Interests that can make large contributions or represent a lot of people are just better able to get their issue—and their version of it—in front of legislators. So they have the ability to frame issues, that people who don't have the sophistication or money or access don't. That side of their story just never gets told, or at least does not get the same degree of attention.

But many issues are much smaller in terms of impact and scope than the big national concerns, or they're not highly controversial, and employee ownership fell into that category. Here, the role of lobbying organizations like the ESOP Association, or people like Louis Kelso andNorm Kurland, who had worked with Kelso,was essentially to go and make an honest case about why this was a good idea, and try to convince members of Congress that this is something they should support on its own merits, and come up with legislative ideas that might help move it forward, like the 1042.

On what is now Section 1042, there was no actually lobbying at all at the time. It just seemed like a good enough of an idea for people to support. So I called other staff members, and they talked to their bosses, and we lined up enough initial support to get some people to sign on to a bill.

It sat there for a some years. I left the Senate in 1981 to start the NCEO. But Senator Long would reintroduce it each year as part of a package of ESOP incentives and, in 1984, it was added to the tax bill and became law.

Q: You were involved in writing the Chrysler Act?

The ESOP piece of it. That was 1978 and 1979. In that case, I worked with Joe Blasi, then working as a staffer on the House side, and we drafted a bill along with staff at the Senate Finance Committee. Long was powerful enough so that it became part of the law.

Q. What happened in 1980?

In 1979, since this was such a good idea that it could sell itself, I decided that what was needed was a way to get the idea out there to people, to get the resources they needed to make intelligent decisions about it; to make people more aware of it in the first place.

Also, because of my academic background, I wanted to find out what really made ESOPs work, not just what people said made them work. (I have a PhD in political science from Cornell, and I taught for a couple of years.)

The only thing I ever wanted to do was fight causes, and whatever you thought about using the government to create more social equity, which was to me an important goal, it wasn't going to happen much through the government, for political and economic reasons. Whether it was a good idea or bad idea, it wasn't going to happen.

So I decided to start an organization to make this happen, although I had no idea how to do that. My plan was to start working on it in 1981 while I still was working in the Senate, but in 1980, the Deocrtas lost control of the Senate, and I ost my job. I got a consulting contract with Control Data on other issues that let me work part-time for three years, and that was enough to live on while I got the NCEO going.

Q: So your mission in the NCEO was to give people the resources to find out that this option was out there, and give them the resources to do it?

Exactly. What attracted me about this idea was that it was a way to use the free market to create more social and economic equity, and also, because of the way I like to work, I hoped it would spur organizations to create more inclusive, participative, open management systems, rather than traditional, top-down, "you do it because I told you" management systems.

Q: A lot of the younger tech companies encourage employees to spend 20% or so of their time working on their own projects.

A few do. Google, for example – that's another area we worked in, they're not an ESOP, but they gave everybody stock options and/or restricted stock, which almost all tech companies do it.

Q: Because so much of it is brain power, as opposed to labor power. ESOPs are very well suited for a variety of companies, but companies that make widgets stand to benefit most from this?

I think the reason you don't see ESOPs in tech companies is because it's very difficult to do an ESOP as a startup, and ESOPs aren't a good vehicle if you want to attract a lot of venture capital, and eventually get sold or go public. Options and similar instruments are technically better suited to those kinds of companies; but ESOPs can work in any kind of business, and we know this from research. One of the first big things we found out was that corporate size, industry, demographics of employees – it doesn't matter if they're young, old, highly educated, poorly educated, high income, low income – it doesn't matter what kind of job they do, none of these things independently affect the success of an ESOP.

Q: So what does?

Three things. First, you have to make enough contributions to an ESOP, so that it's meaningful to people. Second, you need to communicate it well enough so that people actually understand what they're getting. And the third, most important and hardest, you need to create a high involvement, open-book culture.

These are companies that share a lot of financial information and other corporate performance information with employees. They tend to devolve a lot of authority to employees in terms of things like employee teams, self-managing groups, and ad hoc committees. Ther approach is that, management is going to make many fewer decisions and employees more about how work is done.

It doesn't make what business you're in, if you can get people engaged at that level, where they understand the business, understand how the business makes money, and have opportunities to translate that understanding into ideas on how to improve the business – you're going to make a lot more money.

Finding ways for employees to generate more ideas is vastly more important than getting people to work harder; it drowns the significance of extra effort. I'll give you an example – one of our members packs things like T-shirts, such as when “ABC Plumbing Company” wants to give out a T-shirt to everybody. The shirts get packaged in boxes, and they pack them in dozens, and people make mistakes counting dozens, because it's not natural – they'll put in 11 or 13 sometimes.

This is pretty basic work, not high-skilled labor. One of the employees said, "This is stupid, why don't we pack them in tens? There is no rule that they have to be in dozens." They started packing them in tens, and the error rate dropped substantially, and this saved them tens of thousands of dollars.

Imagine if you get a workforce engaged like that, that's figuring out all of these small and sometimes big ideas, about how to do things better, and how that transforms your company into something entirely different. At the same time, it makes your employees feel like they matter.

Those are the three things, and every ESOP research project has confirmed it.

Q: You decided to take your career in a different direction, and start the NCEO. Did you do it by yourself, who else was involved?

It was my idea, and I got started working on it, and then Karen Young joined me. She had worked with me on the Committee; we both lost our jobs at the same time, because the voters decided they didn't want to employ us anymore. Republicans took control of the Senate, so the Democratic staffers were reduced by half.

I was planning to leave anyway; she would have probably stayed on for at least a while, but after looking at some other jobs, she decided to join in this effort. We both lived on our severance pay for a while, then unemployment; then I got a job doing consulting on something totally unrelated. Eventually, we were able to pay her something, and three years later, we were able to pay me something.

For two years, it was just the two of us. In the third year, we actually got a research grant that we hadn't anticipated and hired a young PhD named Katherine Klein, who now teaches at Wharton and has an extremely well-known and highly respected professor. We did this big project to find out if a) if ESOP companies make more money, and b) what makes them more successful if they are.

That was a long project. Three years later we finished it and published it in various places. The research didn't get finished until 1986, and by that time we had more people we were paying. People started to know who we were by then, but that research was really seminal for us in helping people understand what we did, and itgot a lot of publicity. Also, it was transformative to the way people thought about employee ownership. Not at first – at first, there was a lot of resistance, people didn't like us saying it, but over time it became conventional wisdom.

We grew slowly through the 80s, but we managed. We grew through publications and conferences, basically many of the things we do now. We do many more now, but the same model of providing resources to people who're interested in this subject in one form or another, though not consulting.

Q: Why not?

Because the goal of the organization was to fill the need to provide objective, reliable information. To the extent that we put ourselves in the position of selling ESOPs or any other form of employee ownership, it would compromise that.

Also, the ESOP world didn't need another consultant – there were people already trying to make a living doing this. That was not a hole we needed to fill.

We now do some very limited consulting, such as when a company is thinking about these plans, whether it's equity compensation or ESOPs, we can help them think through what their options are. We don't try to sell them on anything, but let them understand how it works, and they can make a decision. This is just a few hours, not a long-term engagement. It's a very small part of our work.

The goal is really to focus on research, outreach, and resources. I wanted a salary, but we also have a mission.

Q: In the first couple of years, what were some successes that kept you in the game?

One of the benefits was that because of my work on the Hill, I did know a number of people who were in this field. Then, some other people were kind enough to give me names of contacts, all of which were written down on note cards in those days. We could then send out a mailing to people saying that we're starting this organization, and there's going to be a newsletter, and we're going to publish some books, and eventually there would be seminars, and whether you'd like to join.

The first full year we had $22,000 in revenue from that. At that point, it was mostly from memberships, although we also put out a book. Then, as time went on, we put out more books, started holding seminars, and much to my surprise, someone said "Why don't you charge the speakers?" Normally, it's the other way around, but these people, the professionals who come and speak here, are getting a market – why are we giving it away?

Somebody came to the office a couple of weeks later, as we were doing a seminar, and said that they would be very interested in doing this. They were knowledgeable, and I told them it was, whatever it was, $1000, and they said "Fine." I thought, "That was easy," so we started charging the speakers, which I think is entirely fair, and that allowed us to keep the fees for the meetings really low, so there was more access to them, and everybody came out ahead.

The second year, in 1981, we had our first conference, which had about 200 people, and now it's over 1000. All these things started bringing in some revenue over time, and we just kept expanding on all that.

Q: Different points of success enabled you to keep it going, but mostly it was the belief in the mission?

Yes, just keep grinding away and put out stuff that people find credible.

Q: What were some of the initial challenges?

It was like any other business, you wonder if you're going to make it from one year to the next, and how you develop markets, and how you do marketing, and how you hire. We were lucky, the first few people we hired were fantastic, made huge contributions, were very dedicated, and willing to work for not much money.

The next 6-7 years it was much more difficult to find the right people, especially paying what we paid. I was still learning how to be a manager, but eventually I gave up on the idea of trying to manage people. This was really the big breakthrough around the early 1990s, around 90-91, when I decided I don't really like telling people how to do their jobs or seeing if they're doing their jobs, I'm just going to trust them.

When I say that we're going to make a decision, and I don't know what the right one is, I would mean it. Instead of having turnover every 2 or 3 years, which is typical for nonprofits that don't pay very well, people said "Hey, it's a pretty cool job, I get a lot of freedom here." We were able to attract incredibly talented people, and now, people hardly ever leave. We've hired some new people, but other than maybe one position, everyone here stays for years and years. We've all gotten older together.

That's been a huge difference, there's a tremendous depth of expertise here.

Q: Who supported your efforts, in the first years?

There was a handful of ESOP professionals who really bought into what we were doing, and a handful of companies I knew that also liked what we were doing. It was a pretty small group.

Norm Kurland was very helpful. He had worked with Louis Kelso. He was a true ESOP advocate, and he was a true friend to us, as we were getting started, when other people were skeptical.

There was another attorney named Jack Curtis. At the time, he was one of 2 or 3 leading ESOP attorneys. He was also on the Senate Finance Committee staff responsible for drafting a lot of ESOP legislation. He was incredibly helpful. He was on our board for many years. Unfortunately, Jack died very young, of cancer, around 1990. Ron Ludwig was his law partner. He's since retired, but at the time, everybody considered him to be THE expert on ESOPS, by far. He was unbelievably helpful in making sure our staff was correct, and held us to a high standard. Bob Smiley was another early supporter.

Q: Jack mentioned you didn't stay in DC?

Yes, we moved to the West Coast in '86 when we were still really small, because it seemed like a better place to live. It didn't matter, since we weren't lobbyists, so the place wasn't very important.

Q: Have you read the Capitalist Manifesto?

Oh yeah. It was one of the first things I read, and I was very impressed. In terms of traditional economics, it's all screwy. I was less interested, and certainly less convinced about the whole Federal Reserve stuff, or the notion of productivity vs productiveness and so on. But his core analysis, that wages would become stagnant over the preceding generations while returns to equity soared, therefore creating an increasing and enormous disparity between the haves and have-nots, that neither the government was going to solve nor private enterprise as currently structured could solve, except, in fact, private enterprise as then structured could only make worse – turned out extraordinarily prescient.

Everybody at the time who read it, every economist, said it was a crock, that what he said would happen would never happen, but what he said would happen is exactly what happened, and in spades. Kelso would have been absolutely horrified by the way the country has become a nation of finance capital, which, more and more analysts have pointed out, is historically the last stage of decline for great empires.

Q: How do you think this speaks to current events.

There's a book we published for Harvard Business School Press titled "Equity: Why Employee Ownership is Good for Business." The first chapter is about this whole journey and the philosophy behind employee ownership and why it's so relevant, not just in the United States but worldwide. To me, it seemed then, and now it seems more passionately than ever, not just a solution, but the only solution that's going to get us out of this horrible mess of disparity between rich and poor.

Q: That's almost word for word what Roland told us, as well.

Yes, many people will tell you that, if you ask them.

Q: What advice would you give to ESOP advisors?

First of all, anybody who claims to be one better be really expert. I would say that about half the ESOPs are set up by people who are, and the other half – by people who claim to be. And of that other half, some of them do a reasonably good job, and some not so good.

If you're going to be involved in this field, you need to go to the conferences, and you need to read the newsletters, and you need to keep up with a fairly complex environment, so then you can make it simple for the people you're dealing with, and help them get through these decisions that they need to make.

Also, I think ESOP advisors need to, and most of them do now, though that certainly was not the case 15-20 years ago, understand that ESOPs are not just about finance, they're about culture. They need to talk to their clients about the importance of culture in the organization, or their clients are ultimately not going to be very happy they did this.

If you can get clients who engage in employee ownership cultures in their companies, it's be good for you in two ways: one is that they will keep being an ESOP, and the other is, they become absolutely evangelical about encouraging other people to do it, which could get you some more clients.